November 25, 2013

NACHA, the organization that administers the Automatic Clearing House (ACH) network, recently announced proposed modifications to its Rules and invited comments on or before January 13, 2014. While much of what NACHA proposes makes eminent sense, we believe that aspects of the proposal are unfair to companies dealing with credit-impaired customers and unduly restrictive. We therefore strongly recommend that affected companies submit comments.

On January 7, 2014, from 12 p.m.to 1 p.m. ET, Ballard Spahr will conduct a webinar, "ACH Access Under Siege." The registration form is now available.

According to NACHA, the proposed Rule changes are designed to improve the functioning of the ACH network and reduce financial and reputational impacts associated with returned entries. Thus, for example, NACHA proposes to halve the level of permissible unauthorized debit entries from 1 percent to 0.5 percent and establish a threshold for data quality returns at 3 percent. In both cases, NACHA advises that the proposed thresholds are more than 16 times the average rates.

NACHA also proposes to establish a 15 percent return threshold for all causes, including unauthorized returns, data quality returns, and insufficient funds returns. This proposal is highly problematic due to its flawed basis and its likely impact on some innocent companies processing payments by ACH.

NACHA recognizes that different originators deal with different customer populations and that, accordingly, originators dealing with subprime customers will generate NSF returns at far higher levels than other originators. Nonetheless, it lumps all originators into a single basket and establishes a single overall return threshold for all. Moreover, it advises that the aggregate return threshold is approximately 10 times the average, rather than more than 16 times the average, used for return thresholds that are associated with originator wrongdoing involving unauthorized or improperly completed items. This strikes us as entirely unwarranted, especially in light of the severe consequence of exceeding the established threshold: excommunication from the NACHA system. If overall returns above specified thresholds are costing receiving depository financial institutions material amounts, requiring high-return originators to pay some kind of financial compensation would appear to be much more justified.

The NACHA proposal also provides that a re-initiated debit entry must be identical to the rejected entry in the fields used for the company name, company ID, and amount. New labeling of a re-initiated entry as a "REDEPOSIT" will also be required. While these proposed requirements are designed to prevent originators from circumventing NACHA limits on the number of re-initiations, if adopted in their present form, they (and an operations bulletin circulated in July) would seem to prohibit the practice adopted by some issuers of submitting an entry for a lesser amount than the original entry in order to attempt collection of a portion of the authorized amount. Further attention to this issue may also be warranted.

The proposal comes in the midst of a concerted effort by federal and New York authorities to deny the ACH network to online payday lenders deemed to be in violation of state licensing and usury laws. (For more on New York's recent efforts, see our legal alert.) However, the NACHA proposal would go much further since it would potentially have the effect of denying the ACH network to companies that comply with all state laws, not just companies that disregard borrower state laws.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. Members of the Group are experienced in assisting clients in the preparation and filing of comments on rulemaking proposals.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.